Abstract:

Past research on repeated decisions finds two robust deviations from maximization (i.e., probability matching and underweighting of rare events). People’s decisions rely only on a small subset of their past experiences, rather than on all experiences, can account for these findings. Why is that so? The common explanation is due to cognitive limitations, such as limited memory capacity, forgotten earlier experiences. However, recent studies suggest an alternative approach, the cognitive sophistication approach, according to which a smart and complex strategy of seeking for patterns underlies the tendency to rely on small samples. Whereas the cognitive limitations approach predicts that people with greater cognitive abilities exhibit less deviations from maximization, while the cognitive sophistication approach predicts the opposite. This exploratory study examined the relation between deviations from maximization and cognitive abilities. Some of the findings provide support for the cognitive limitations approach, while others support the cognitive sophistication approach. The current mixed findings emphasis the need for further research.